Market failure — practice question

Study the source material thoroughly before you answer Question 1. Source material: The future of the economy of St. Kitts and Nevis St. Kitts and Nevis is a small Caribbean nation made up of two islands. The country’s three key industries are tourism, financial services and agriculture. Visitors are drawn by the country’s beaches, coral reefs, forts, rainforests and shipwrecks. However, if rainforests keep being cleared and soil erosion keeps contaminating the coral reefs, causing marine life to die, tourism may be put off. The St. Kitts and Nevis Government is also worried that the social costs of tourism are greater than the private costs. St. Kitts and Nevis’s financial services include a growing banking sector. Among the country’s commercial banks are a few foreign multinational companies (MNCs). These MNCs are attracted by the country’s relatively high incomes, the absence of personal income tax and a relatively high literacy rate. Some of the country’s main agricultural products are carrots, onions, peanuts and sweet potatoes. In 2017, the St. Kitts and Nevis Government introduced a training scheme to raise the productivity of onion farmers. Other important industries in St Kitts and Nevis include healthcare and fishing. Table 1.1 shows healthcare spending as a percentage of GDP and life expectancy in six selected countries in 2022. The small scale of St. Kitts and Nevis’s fishing industry means that it imports large quantities of fish. The country’s fishing boats are small and some lack up-to-date equipment. A larger fishing industry, with bigger boats, may bring a number of benefits to the country. Changes in the structure and performance of industries in St. Kitts and Nevis may alter the country’s price level. Between 2018 and 2020, the country experienced deflation. This affected people’s purchasing power, saving and debts. It also affected the country’s exports and firms’ investment decisions. Answer all parts of Question 1. Refer to the source material in your answers.